October 22, 2020


Inequality and Its Discontents (Michael J. Boskin, Oct. 21st, 2020, Project Syndicate)

[C]onsumption and disposable income are considerably less unequal than the oft-quoted market income figures. Average measures taken over a longer term tend to show less inequality, reflecting the fact that many people are poor or rich only temporarily. Many of my university students currently have low incomes, but will almost certainly be very well off later in their lives. It is not surprising that natural age-earnings profiles and measures of life-cycle wealth accumulation would show considerable inequality at any point in time. All data sources have strengths and limitations, be it sample size, frequency, item coverage, or comparability (especially relevant in the case of international data).

Accounting as best as I can for these factors, I have compiled the following summary of major trends in US inequality in recent decades. Since around 1980, the skill premium in wages has grown substantially, whereas lower-skill real (inflation-adjusted) wages have grown more slowly (not to be confused with a decline). This reflects technology's bias toward skilled labor, globalization's negative effects on less-skilled wage earners, and the composition of labor-skill supply and demand.

During this period, overall inequality increased in almost all advanced economies (though some believe it will reverse), suggesting that domestic policies could not have been the primary cause. Similarly, after a long period of stability, labor's share of national income has declined in all major economies.

Meanwhile, though social mobility has remained at considerable levels, it likely declined, including inter-generationally. Changes in the wage distribution have been concentrated mostly in the top half, and though there has been a relative increase in wealth at the very top, it is less than some commentators claim.

Indeed, there has been a huge increase in cash and in-kind transfer payments. One-sixth of US income comes from such payments, and the rate in Western Europe's social-welfare states is even higher. America's unfunded entitlements liabilities have grown to several times the already-high national debt.

While inequality in disposable income (and even more so in consumption) remains substantial, it is much lower than inequality in market incomes. After adding transfers and subtracting taxes, one finds that the income of the top 1% in the US falls by over one-third, while that of the bottom 20% triples.

What really gets mismeasured here is the improved quality of what we are consuming with that income. 

Posted by at October 22, 2020 7:13 AM